Message behind IT numbers awaited

Bangalore: The country’s top software firms begin reporting results for the June quarter this week, although more people will be looking at their forecasts for the next quarter and assessment of business sentiment in the US than the numbers themselves.

That’s because a recovery in the US isn’t just important to software firms, but for the Indian economy itself. And while expectations from the June quarter results are running low, the focus will essentially be on what these firms have to say in terms of the future outlook and the trend in pricing.

The recession in the US, the world’s largest technology market, had forced cuts in tech budgets, resulting in a slowdown in business for Indian software firms. Tech forecaster Gartner Inc. on Tuesday projected a 6% decline in global information technology (IT) spending in 2009 to $3.2 trillion (Rs156.5 trillion), because of the economic slowdown as well as exchange rate fluctuations. In March, Gartner had forecast a 3.8% decline from the $3.4 trillion spent in 2008.

The numbers run contrary to statements in June by two Indian firms, Tata Consultancy Services Ltd (TCS) and Infosys Technologies Ltd, that the decline in outsourcing orders from Western customers since last September has been arrested. That isn’t exactly the case, according to a statement from Richard Gordon, research vice-president and head of global forecasting at Gartner: “While the global economic downturn shows signs of easing, this year IT budgets are still being cut and consumers will need a lot more persuading before they can feel confident enough to loosen their purse strings.”

Gartner said global spending on software services alone would fall 5.6% to $761 billion in 2009, but would grow 3% the following year to $784 billion.

Infosys, India’s second largest software firm and considered an industry standard, is set to report its first quarter (Q1) results on Friday. TCS will report its on 17 July, and Wipro Ltd and Tech Mahindra Ltd, the new owner of the fraud-hit Satyam Computer Services Ltd, on 22 July. HCL Technologies Ltd, which follows the July-June fiscal year, will report its fourth quarter and full-year results in August.

Analysts Surendra Goyal and Vishal Agarwal of Citigroup Global Markets India Pvt. Ltd expect most large, or tier I, software firms to report a revenue decline of at least 2% in the April-June quarter over the preceding quarter, owing to the decline in business volumes and pressure on pricing. “(The) focus will be on management comments—investors will want to gauge the pace of recovery,” the analysts wrote in a recent report.

Research firm Motilal Oswal Securities Ltd sees some easing in the pressure on the banking, financial services and insurance (BFSI) divisions of IT companies in Q1. “We expect BFSI and telecom, two verticals that have largely contributed to revenue decline in the last two quarters, to continue contributing towards volume declines,” Motilal Oswal analysts Ashwin Mehta and Vihang Naik wrote in a report on 26 June. “(However), the severity of the cuts is likely to reduce and positive statements on stability of at least BFSI should be heard from the companies.” The telecom (another troubled sector globally) and BFSI divisions together contribute 50% of the total revenue for India’s top four IT companies, they noted.

Investors will be keen to know the impact on pricing owing to the renegotiation of contracts earlier in the year. While most analysts agree that average pricing will decline, the moot question is how bad the fall will be. HSBC points out in a recent research note, “While most pricing negotiations with the tier I clients are set to conclude by end-June for all the vendors, the March and April negotiations’ full impact is likely to hurt average billing for the June quarter. We estimate pricing will be down 3% q-o-q (quarter-on-quarter) in constant currency.”

“In the past few months, the (demand) environment has marginally improved, but it is still not to the (peak) level. Everyone will look at projections in the second half (of the calendar year),” said Gaurav Dua, head of research at Sharekhan Ltd, a Mumbai-based brokerage. Infosys’ guidance for the July-September quarter as well as the entire year will be used as a yardstick by the markets to gauge how the second half of the year could turn out. The Citigroup analysts say Infosys is unlikely to raise the constant currency guidance for two reasons: “(1) Small pricing decline quarter-on-quarter (against [the company’s] assumption of flat pricing), which is likely to be offset by slightly better volumes. (2) It is too early to extrapolate the improvement in sentiment to the full year guidance.”

The company is expected to increase its dollar-based guidance owing to the depreciation of the dollar against the euro and the British pound.

Apart from the pressure on pricing, most Indian IT firms will suffer also thanks to the 6% appreciation of the rupee against the dollar last quarter. Its impact though is likely to be marginally offset by the weakening of the greenback against the euro and the pound. This depreciation of the dollar should aid revenues of Indian offshore firms such as Tech Mahindra, which would benefit the most, wrote Manik Taneja, equity analyst with Mumbai-based brokerage Emkay Global Financials Ltd, on 3 July. At least 60% of Tech Mahindra’s revenue is billed in euros and pounds. While the company will gain from cross currency movements, the core British Telecom business is expected to continue being weak.

According to a Mint poll of six brokerages—Citigroup, Sharekhan, Emkay, Religare Capital Markets Ltd, Motilal Oswal and Angel Broking Ltd—Infosys’ revenue for the June quarter is expected to decline 5.2% on average over the preceding three months to Rs5,342 crore. Net profit is seen down 14.4% at Rs1,380 crore. In April, Infosys had forecast its Q1 revenue at Rs5,379-5,480 crore.

TCS, too, is expected to show a decline in both profit and revenue at Rs1,256 crore (1.5% down from the previous quarter) and Rs6,864 crore, respectively (4.3% down). Wipro, India’s third largest software exporter, is likely to report a 2% increase in profit to Rs924 crore on account of lower forex losses, though revenue, including its consumer products business, is seen declining 1.5% to Rs6,448 crore.